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Bulletin No. 2005-4October 17, 200
HIGHLIGHTS
OF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.
INCOME TAX
T.D. 9225, page 716.Final regulations under section 368 of the Code provide guid-ance regarding the satisfaction of the continuity of interest re-quirement for corporate reorganizations. Specifically, theseregulations identify certain circumstances in which the deter-
mination, of whether a proprietary interest in the target corpo-ration is preserved, would be made by reference to the valueof the issuing corporations consideration on the last businessday before there is an agreement to effect the potential reor-ganization.
REG10603098, page 739.Proposed regulations under section 863 of the Code governthe source of income from certain space and ocean activities.It also contains proposed regulations governing the source ofincome from certain communications activities. The regula-tions affect persons who derive income from activities con-ducted in space, or on or under water not within the jurisdictionof a foreign country, possession of the United States, or theUnited States (in international water). It also affects personswho derive income from transmission of communications. Apublic hearing is scheduled for December 15, 2005.
Notice 200574, page 726.This notice announces that Treasury and the Internal RevenueService (IRS) will amend the regulations under section 367(a)of the Code to clarify the application of regulations section1.367(a)8, including the provisions addressing the treatmentof gain recognition agreements as a result of certain commonasset reorganizations involving the U.S. transferor, the trans-
feree foreign corporation, and the transferred corporation.
EXEMPT ORGANIZATIONS
REG11125705, page 759.Proposed regulations clarify the substantive requirements ftax exemption under section 501(c)(3) of the Code. This doument also contains provisions that clarify the relationship btween the substantive requirements for tax exemption und
section 501(c)(3) and the imposition of section 4958 excitaxes.
Announcement 200575, page 764.Alpha Kappa Psi Scholarship Fund, of Minneapolis, MN; Alphbets Childcare Center, Inc., of Clarksville, TN; Inner City Dvelopment Foundation, of Los Angeles, CA; and Rocky RoIncorporated, of Snowmass Village, CO, no longer qualify organizations to which contributions are deductible under setion 170 of the Code.
(Continued on the next pag
Announcements of Disbarments and Suspensions begin on page 765.
Finding Lists begin on page ii.
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ADMINISTRATIVE
Notice 200573, page 723.This notice summarizes and clarifies the relief previouslygranted under sections 6081, 6161, 6656, and 7508A of theCode with respect to taxpayers affected by Hurricane Katrina.By news releases issued on August 30, 2005, September2, 2005, September 8, 2005, and September 14, 2005,
the IRS granted relief from filing and payment deadlines,and granted relief from the acts listed in regulations section301.7508A1(c)(1) and Rev. Proc. 200527, 200520 I.R.B.1050. See IR200584, IR200591, IR200596, andIR2005103. The news releases provided that taxpayersaffected by the disaster will have until January 3, 2006, tofile certain tax returns and submit payments. In addition, thenews releases announced that the IRS will abate interest andany late filing or late payment penalties that otherwise wouldapply. This relief includes the September 15, 2005, due datefor estimated taxes and for calendar-year corporate returnswith automatic extensions. This notice summarizes the reliefpreviously granted in the news releases.
Rev. Proc. 200567, page 729.Per diem allowances. This procedure provides optional rulesfor deeming substantiated the amount of certain business ex-penses of traveling away from home reimbursed to an em-ployee or deductible by an employee or self-employed individ-ual. Rev. Proc. 200510 superseded.
Announcement 200574, page 764.This document changes the date of a public hearing on pro-posed regulations (REG10852400, 200523 I.R.B. 1209)relating to the circumstances under which a partnership maytake partner-level deductions and losses into account in com-puting its withholding tax obligation with respect to a foreignpartners allocable share of effectively connected taxable in-come. The public hearing is rescheduled for November 16,2005.
October 17, 2005 200542 I.R.B.
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The IRS Mission
Provide Americas taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.
Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.
Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considereand Service personnel and others concerned are cautionagainst reaching the same conclusions in other cases unlethe facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.1986 Code.This part includes rulings and decisions based on provisions the Internal Revenue Code of 1986.
Part II.Treaties and Tax Legislation.This part is divided into two subparts as follows: SubpartTax Conventions and Other Related Items, and Subpart B, Leislation and Related Committee Reports.
Part III.Administrative, Procedural, and MiscellaneouTo the extent practicable, pertinent cross references to thesubjects are contained in the other Parts and Subparts. Alincluded in this part are Bank Secrecy Act Administrative Rings. Bank Secrecy Act Administrative Rulings are issued the Department of the Treasurys Office of the Assistant Se
retary (Enforcement).
Part IV.Items of General Interest.This part includes notices of proposed rulemakings, disbment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative indfor the matters published during the preceding months. Themonthly indexes are cumulated on a semiannual basis, and apublished in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropria
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
200542 I.R.B. October 17, 200
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Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 62.AdjustedGross Income Defined
26 CFR 1.622: Reimbursements and other expense
allowance arrangements.
Rules are provided under which a reimbursement
or other expense allowance arrangement for the cost
of lodging, meal, and incidental expenses, or of meal
and incidental expenses, incurred by an employee
while traveling away from home will satisfy the re-
quirements of 62(c) of the Code for substantia-
tion of the amount of the expenses. See Rev. Proc.
2005-67, page 729.
Section 162.Trade orBusiness Expenses
26 CFR 1.16217: Reporting and substantiation of
certain business expenses of employees.
Rules are provided for substantiating the amount
of a deduction for an expense for meal and incidental
expenses, or for incidental expenses only, incurred
while traveling away from home. See Rev. Proc.
2005-67, page 729.
Section 368.DefinitionsRelating to CorporateReorganizations
26 CFR 1.3681: Purpose and scope of exception of
reorganization exchanges.
T.D. 9225
DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 1
Corporate Reorganizations;Guidance on the Measurementof Continuity of Interest
AGENCY: Internal Revenue Service(IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document contains final
regulations that provide guidance regard-
ing the satisfaction of the continuity of in-
terest requirement for corporate reorgani-
zations. The final regulations affect cor-
porations and their shareholders.
DATES: Effective Date: These regulations
are effective September 16, 2005.
FOR FURTHER INFORMATION
CONTACT: Jeffrey B. Fienberg, at (202)
6227770 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The Internal Revenue Code of 1986
(Code) provides for general nonrecog-
nition treatment for reorganizations de-
scribed in section 368 of the Code. In
addition to complying with the statutory
and certain other requirements, to qualify
as a reorganization, a transaction gener-
ally must satisfy the continuity of interest(COI) requirement. COI requires that, in
substance, a substantial part of the value
of the proprietary interests in the target
corporation be preserved in the reorgani-
zation.
On August 10, 2004, the IRS and Trea-
sury Department published a notice of
proposed rulemaking (REG12970604,
20042 C.B. 478) in the Federal Register
(69 FR 48429) (hereinafter the proposed
regulations) identifying certain circum-
stances in which the determination of
whether a proprietary interest in the targetcorporation is preserved would be made
by reference to the value of the issuing
corporations stock on the day before
there is an agreement to effect the poten-
tial reorganization. In particular, in cases
in which the consideration to be tendered
to the target corporations shareholders is
fixed in a binding contract and includes
only stock of the issuing corporation and
money, the issuing corporation stock to be
exchanged for the proprietary interests in
the target corporation would be valued as
of the end of the last business day beforethe first date there is a binding contract
to effect the potential reorganization (the
signing date rule). Under the proposed
regulations, consideration is fixed in a
contract if the contract states the number
of shares of the issuing corporation and
the amount of money, if any, to be ex-
changed for the proprietary interests in
the target corporation. The signing date
rule is based on the principle that, in case
in which a binding contract provides fo
fixed consideration, the target corporation
shareholders generally can be viewed a
being subject to the economic fortunes o
the issuing corporation as of the signingdate.
No public hearing regarding the pro
posed regulations was requested or held
However, several written and electroni
comments regarding the notice of pro
posed rulemaking were received. Afte
consideration of the comments, the pro
posed regulations are adopted as revise
by this Treasury decision.
Explanation of Provisions
These final regulations retain the general framework of the proposed regula
tions but make several modifications in re
sponse to the comments received. The fol
lowing sections describe the most signif
icant comments and the extent to which
they have been incorporated into these fi
nal regulations.
A. Fixed Consideration
As stated above, the proposed regu
lations require that the consideration in
a contract be fixed in order for the signing date rule to apply. One commentato
identified a number of contractual ar
rangements that do not provide for fixe
consideration within the meaning of th
proposed regulations, but, nevertheless
are arrangements in which the consid
eration should be treated as fixed and
therefore, eligible for the signing dat
rule. In particular, the commentator iden
tified a number of circumstances in which
rather than stating the number of share
and money to be exchanged for targe
corporation shares, a contract may provide that a certain percentage of targe
corporation shares will be exchanged fo
stock of the issuing corporation. One suc
circumstance is where a merger agree
ment permits the target corporation som
flexibility in issuing its shares betwee
the signing date and effective date of th
potential reorganization. Such an issuanc
may occur, for example, upon the exercis
200542 I.R.B. 716 October 17, 200
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of employee stock options. As a result,
the total number of outstanding target cor-
poration shares at the effective time of the
merger and, therefore, the total number of
shares of the acquiring corporation to be
issued in the merger, may not be known
when the merger agreement is signed.
In addition, a contract may permit the
target corporation shareholders to elect
to receive stock (the number of shares of
which may be determined pursuant to a
collar) and/or money or other property in
respect of target corporation stock, but
provide that a particular percentage of tar-
get corporation shares will be exchanged
for stock of the issuing corporation and a
particular percentage of target corporation
stock will be exchanged for money. In
these cases, if either the stock or the cash
consideration is oversubscribed, adjust-
ments are made to the consideration to
be tendered in respect of the target cor-poration shares such that the specified
percentage of target corporation shares is,
in fact, exchanged for stock of the issuing
corporation.
The IRS and Treasury Department
agree that a contract that provides for ei-
ther the percentage of the number of shares
of each class of target corporation stock,
or the percentage by value of the target
corporation shares, to be exchanged for is-
suing corporation stock should be treated
as providing for fixed consideration, as
long as the target corporation shares to beexchanged for issuing corporation stock
and the target corporation shares to be
exchanged for consideration other than is-
suing corporation stock each represents an
economically reasonable exchange. Just
as in cases in which the contract states the
number of shares of the issuing corpora-
tion and the amount of money, if any, to be
exchanged for the proprietary interests in
the target corporation, in these cases, the
target corporation shareholders generally
can be viewed as being subject to the eco-
nomic fortunes of the issuing corporationas of the signing date. Accordingly, these
final regulations include an expanded set
of circumstances in which a contract will
be treated as providing for fixed consider-
ation.
B. Contingent Consideration
The fact that a contract provides for
contingent consideration will generally
prevent a contract from being treated as
providing for fixed consideration. One
commentator suggested that a contract
should not be treated as failing to provide
for fixed consideration solely because
it provides for contingent consideration
that can only increase the proportion of
issuing corporation stock to cash to be
exchanged for target corporation shares.
Where stock of the issuing corporation is
the only type of consideration that is sub-
ject to a contingency, the delivery of any
of the contingent consideration to the tar-
get corporation shareholders will enhance
the preservation of the target corporations
shareholders proprietary interests. There-
fore, these final regulations provide for a
limited exception to the general rule that an
arrangement that provides for contingent
consideration will not be one to which the
signing date rule applies. The exception
applies to cases in which the contingentconsideration consists solely of stock of
the issuing corporation and the execution
of the potential reorganization would have
resulted in the preservation of a substantial
part of the value of the target corporation
shareholders proprietary interests in the
target corporation if none of the contingent
consideration were delivered to the target
corporation shareholders.
The IRS and Treasury Department con-
tinue to study whether other arrangements
involving contingent consideration should
be within the scope of the signing daterule. Among these arrangements are cases
in which the contingent consideration con-
sists not only of issuing corporation stock
but also of money or other property and
cases in which the issuing corporation
stock to be issued in respect of target cor-
poration stock is determined pursuant to a
collar.
C. Nature of Consideration
As described above, under the proposed
regulations, the signing date rule appliesonly when the consideration to be provided
in respect of target corporation shares in-
cludes only stock of the issuing corpora-
tion and money. One commentator sug-
gested that the signing date rule should be
expanded to apply to transactions in which
the non-stock consideration includes prop-
erty other than money. Under these final
regulations, the signing date rule may ap-
ply in such cases. Therefore, under these
final regulations, the signing date rule may
apply, for example, in cases in which pro-
prietary interests in the target corporation
are exchanged for stock and securities of
the issuing corporation.
D. Valuation
1. The as of the end of the last business
day rule
The proposed regulations require that,
if the signing date rule applies, the con-
sideration to be tendered in respect of the
target corporation shares surrendered be
valued as of the end of the last business
day before the first date there is a bind-
ing contract to effect the potential reorga-
nization. One comment requested clarifi-
cation of the meaning of as of the end of
the last business day. That comment sug-
gested that an average of the high and low
trade price on that day should be an ac-ceptable value for this purpose. Alterna-
tively, the comment suggested that if a sin-
gle trade were to determine the value of the
issuing corporation stock, the closing price
of the issuing corporation stock on the rele-
vant market should be used. The comment
further described an approach for identify-
ing the relevant stock market.
In response to these comments, these
final regulations remove the requirement
that the consideration be valued as of the
end of the last business day before the first
date that there is a binding contract. In-stead, they provide general guidance that
the consideration to be exchanged for tar-
get corporation shares pursuant to a con-
tract must be valued the day before such
contract is a binding contract.
2. New issuances
The IRS and Treasury Department
recognize that the application of the re-
quirement that the consideration to be
exchanged for proprietary interests in the
target corporation be valued on the lastbusiness day before the first date there is
a binding contract to effect the potential
reorganization may be unclear in cases
in which the consideration does not exist
prior to the effective date of the reorgani-
zation. For example, suppose that, in the
potential reorganization, the issuing cor-
poration will issue a new class of its stock
in exchange for the shares of the target
corporation. The question has arisen as
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to how to value those to be issued shares
under the signing date rule, given that they
do not exist on the last business day before
the first date that there is a binding con-
tract to effect the potential reorganization.
Thus, these final regulations clarify that
this new class of stock will be deemed to
have been issued on the last business day
before the first date there is a binding con-
tract to effect the potential reorganization
for purposes of applying the signing date
rule.
E. Escrowed Stock
1. Pre-closing covenants
The proposed regulations provide that
placing part of the stock issued or money
paid into escrow to secure customary tar-
get representations and warranties will
not prevent the consideration in a con-
tract from being fixed. One commentsuggested that this rule should be ex-
panded to include consideration placed in
escrow to secure targets performance of
customary pre-closing covenants (rather
than representations and warranties). That
commentator stated that there is no rea-
son to distinguish between customary
pre-closing covenants, on the one hand,
and customary representations and war-
ranties, on the other hand. The IRS and
Treasury Department agree. Accordingly,
these final regulations extend the rule
related to escrows to include considera-
tion placed in escrow to secure targets
performance of customary pre-closing
covenants.
2. Effect of escrowed consideration on
satisfaction of COI
Some commentators have indicated that
certain examples in the proposed regula-
tions suggest that escrowed stock, even if
it is forfeited to the issuing corporation,
is treated as preserving the target share-
holders proprietary interests in the targetcorporation. The IRS and Treasury De-
partment believe that escrowed consider-
ation that is forfeited should not be taken
into account in determining whether the
COI requirement is satisfied. This con-
clusion reflects the view that the forfei-
ture of escrowed consideration is in sub-
stance a purchase price adjustment. Ac-
cordingly, the examples in these final reg-
ulations reflect that forfeited stock is not
treated as preserving the target corporation
shareholders proprietary interests in the
target corporation and forfeited non-stock
consideration is not treated as counting
against the preservation of the target cor-
porations shareholders proprietary inter-
est in the target corporation. The IRS and
Treasury Department continue to consider
the effect on COI of escrowed considera-
tion and contingent consideration.
3. Revenue Procedure 8442
One commentator requested clarifica-
tion regarding the impact of the proposed
regulations on Revenue Procedure 8442,
19841 C.B. 521. Rev. Proc. 8442 in-
cludes certain operating rules of the IRS
regarding the issuance of letter rulings,
including the circumstances in which the
placing of stock in escrow will not prevent
the IRS from issuing a private letter ruling.
The IRS and Treasury Department con-tinue to review the existing revenue pro-
cedures relating to reorganizations in light
of the numerous regulatory changes since
the publication of these procedures and the
policy against issuing rulings in the reor-
ganization area unless there is a signifi-
cant issue, which is reflected in Rev. Proc.
20053. Rev. Proc. 8442 is not amended
at this time.
F. Anti-Dilution Provisions
One comment suggested that consider-ation in a contract should not be treated as
fixed unless the contract includes a cus-
tomary anti-dilution provision. The com-
mentator posited an example in which the
absence of an anti-dilution clause and the
occurrence of a stock split with respect to
the stock of the issuing corporation prior
to the effective date of a potential reorgani-
zation results in the value of the considera-
tion received in respect of the target corpo-
ration shares being substantially different
from its value on the day before the first
date there is a binding contract.The IRS and Treasury Department do
not believe that the absence of a custom-
ary anti-dilution provision should neces-
sarily preclude the application of the sign-
ing date rule as dilution may not, in fact,
occur. However, the IRS and Treasury De-
partment are concerned that application of
the signing date rule is not appropriate if
the contract does not contain an anti-dilu-
tion clause relating to the stock of the issu-
ing corporation and the issuing corporatio
alters its capital structure between the firs
date there is an otherwise binding contrac
to effect the potential reorganization an
the effective date of the potential reorgani
zation in a manner that materially alters th
economic arrangement of the parties to th
binding contract. Accordingly, these fina
regulations provide that, in such cases, th
consideration will not be treated as fixed.
G. Contract modifications
The proposed regulations require that i
a term of a binding contract that relates t
the amount or type of consideration the tar
get shareholders will receive in a poten
tial reorganization is modified before th
closing date of the potential reorganiza
tion, and the contract as modified is a bind
ing contract, then the date of the modifica
tion shall be treated as the first date theris a binding contract. Thus, such a modi
fication requires that the stock of the issu
ing corporation be valued as of the end o
the last business day before the date of th
modification in order to determine whethe
the transaction satisfies the COI require
ment.
One commentator suggested that a con
tract should not be treated as being mod
ified for this purpose if the modification
has the sole effect of increasing the num
ber of shares of the issuing corporatio
to be received by the target shareholdersThe IRS and Treasury Department agre
that, because such a modification only en
hances the preservation of the target cor
porations shareholders proprietary inter
ests, it is not appropriate to value the con
sideration to be provided to the target cor
poration shareholders as of the day befor
the date of the modification rather than a
of the day before the date of the origi
nal contract, at least in cases in which th
transaction would have satisfied the CO
requirement under the signing date rule i
there had been no modification. Thereforethese final regulations provide that a mod
ification that has the sole effect of provid
ing for the issuance of additional shares o
issuing corporation stock to the target cor
poration shareholders will not be treated a
a modification if the execution of the po
tential reorganization would have resulte
in the preservation of a substantial part o
the value of the target corporation share
holders proprietary interest in the targe
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corporation if there had been no modifi-
cation. In such cases, the determination
of whether a proprietary interest in the tar-
get corporation has been preserved is made
by reference to the value of the consid-
eration as of the last business day before
the first date the contract was binding, not
the last business day before the modifica-
tion. The IRS and Treasury Department
continue to consider whether this excep-
tion should be extended to certain cases in
which the modification results in not only
additional shares of the issuing corporation
to be issued to target corporation share-
holders, but also additional money or other
property to be transferred to target corpo-
ration shareholders.
H. Application of Principle Illustrated by
Examples
One commentator asked whether the
principle that the COI requirement is sat-isfied where 40 percent of the target cor-
poration stock is exchanged for stock in
the issuing corporation that is illustrated in
the examples of the proposed regulations
(which relate to the application of the sign-
ing date rule) also applies in cases in which
the signing date rule does not apply. The
IRS and Treasury Department believe that
this principle is equally applicable to cases
in which the signing date rule does not ap-
ply as it is to cases in which the signing
date rule does apply.
I. Restricted Stock
The IRS and Treasury Department are
continuing to consider the appropriate
treatment of restricted stock in the deter-
mination of whether the COI requirement
is satisfied.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations and, because
these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Therefore, a Regu-
latory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Code,
the proposed regulations preceding these
regulations were submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regula-tions is Christopher M. Bass of the Office
of the Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and Treasury Department participated
in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.3681 is amended as
follows:
1. Paragraph (e)(1)(i) is amended as
follows:
A. Removing the language (e)(3) and
adding in its place (e)(4) wherever it ap-
pears.
B. Removing the language
(e)(3)(i)(A) and adding (e)(4)(i)(A)
in its place.
2. Redesignating paragraphs (e)(2)
through (e)(7) as (e)(3) through (e)(8),
respectively.
3. Adding a new paragraph (e)(2).
4. In newly designated paragraphs
(e)(3) through (e)(8), removing the lan-
guage (e)(6) wherever it appears, and
adding the language (e)(7) in its place.
5. In newly designated paragraphs
(e)(3) through (e)(8), removing the lan-guage (e)(4) wherever it appears, and
adding the language (e)(5) in its place.
6. In newly designated paragraphs
(e)(3) through (e)(8), removing the lan-
guage (e)(3) wherever it appears, and
adding the language (e)(4) in its place.
7. In newly designated paragraphs
(e)(3) through (e)(8), removing the lan-
guage (e)(2) wherever it appears, and
adding the language (e)(3) in its place.
8. In newly designated paragraph
(e)(4)(ii)(B), removing the language
(e)(3)(i)(A) wherever it appears, and
adding the language (e)(4)(i)(A) in its
place.
9. In newly designated paragraph
(e)(7), Example 1, removing the language
(e)(1) and (2) wherever it appears, and
adding the language (e)(1) and (3) in its
place.
10. In newly designated paragraph
(e)(7), Example 2, make the following
revisions:
A. Remove the language (e)(3)(i)(B)
wherever it appears, and add the language
(e)(4)(i)(B) in its place.
B. Remove the language (e)(3)(i)(A)
and (ii)(B) wherever it appears, and add
the language (e)(4)(i)(A) and (ii)(B) in
its place.
11. In newly designated paragraph
(e)(7), Example 3, removing the language(e)(1) and (2) wherever it appears, and
adding the language (e)(1) and (3) in its
place.
12. In newly designated paragraph
(e)(7), Example 4, paragraph (iii), remov-
ing the language (e)(3)(i)(A) and (B)
wherever it appears, and adding the lan-
guage (e)(4)(i)(A) and (B) in its place.
13. In newly designated paragraph
(e)(7), Example 6, removing the language
(e)(3)(i)(A) and (B) wherever it appears,
and adding the language (e)(4)(i)(A) and
(B) in its place.14. In newly designated paragraph
(e)(7), Example 8, removing the language
(e)(3)(i)(A) wherever it appears, and
adding the language (e)(4)(i)(A) in its
place.
15. Revising newly designated para-
graph (e)(8).
The addition and revision read as fol-
lows:
1.3681 Purpose and scope of exception
of reorganization exchanges.
* * * * *
(e) * * *
(2) Measuring continuity of inter-
est(i) In general. In determining
whether a proprietary interest in the target
corporation is preserved, the consideration
to be exchanged for the proprietary inter-
ests in the target corporation pursuant to
a contract to effect the potential reorgani-
zation shall be valued on the last business
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day before the first date such contract is a
binding contract, if such contract provides
for fixed consideration.
(ii) Binding contract(A) In general.
A binding contract is an instrument en-
forceable under applicable law against the
parties to the instrument. The presence of a
condition outside the control of the parties
(including, for example, regulatory agency
approval) shall not prevent an instrument
from being a binding contract. Further, the
fact that insubstantial terms remain to be
negotiated by the parties to the contract, or
that customary conditions remain to be sat-
isfied, shall not prevent an instrument from
being a binding contract.
(B) Modifications(1) In general. If a
term of a binding contract that relates to
the amount or type of the consideration the
target shareholders will receive in a poten-
tial reorganization is modified before the
closing date of the potential reorganiza-tion, and the contract as modified is a bind-
ing contract, the date of the modification
shall be treated as the first date there is a
binding contract.
(2) Exception. Notwithstanding para-
graph (e)(2)(ii)(B)(1) of this section, a
modification of a term that relates to the
amount or type of consideration the target
shareholders will receive in a potential
reorganization will not be treated as a
modification for purposes of that provi-
sion if
(i) That modification has the sole effectof providing for the issuance of additional
shares of issuing corporation stock to the
target corporation shareholders; and
(ii) The execution of the potential re-
organization would have resulted in the
preservation of a substantial part of the
value of the target corporation sharehold-
ers proprietary interest in the target corpo-
ration if there had been no modification.
(C) Tender offers. For purposes of this
paragraph (e)(2), a tender offer that is
subject to section 14(d) of the Securities
and Exchange Act of 1934 [15 U.S.C.78n(d)(1)] and Regulation 14D (17 CFR
240.14d1 through 240.14d101) and
is not pursuant to a binding contract, is
treated as a binding contract made on the
date of its announcement, notwithstanding
that it may be modified by the offeror
or that it is not enforceable against the
offerees. If a modification (not pursuant
to a binding contract) of such a tender
offer is subject to the provisions of Reg-
ulation 14d6(c) (17 CFR 240.14d6(c))
and relates to the amount or type of the
consideration received in the tender offer,
then the date of the modification shall be
treated as the first date there is a binding
contract.
(iii) Fixed consideration(A) In gen-
eral. A contract provides for fixed consid-
eration if it provides
(1) The number of shares of each class
of stock of the issuing corporation, the
amount of money, and the other property
(identified either by value or by specific
description), if any, to be exchanged for all
of the proprietary interests in the targetcor-
poration;
(2) The number of shares of each class
of stock of the issuing corporation, the
amount of money, and the other property
(identified either by value or by specific
description), if any, to be exchanged for
each proprietary interest in the target cor-poration;
(3) The percentage of the number of
shares of each class of proprietary interests
in the target corporation, or the percentage
(by value) of the proprietary interests in
the target corporation, to be exchanged for
stock of the issuing corporation, provided
that the proprietary interests in the target
corporation to be exchanged for stock of
the issuing corporation and the proprietary
interests in the target corporation to be ex-
changed for consideration other than stock
of the issuing corporation each representsan economically reasonable exchange as
of the last business day before the first date
there is a binding contract to effect the po-
tential reorganization; or
(4) The percentage of each proprietary
interest in the target corporation to be ex-
changed for stock of the issuing corpora-
tion, provided that the portion of each pro-
prietary interest in the target corporation
to be exchanged for stock of the issuing
corporation and the portion of each pro-
prietary interest in the target corporation
to be exchanged for consideration otherthan stock of the issuing corporation each
represents an economically reasonable ex-
change as of the last business day before
the first date there is a binding contract to
effect the potential reorganization.
(B) Shareholder elections(1) In gen-
eral. A contract that is not described in
paragraph (e)(2)(iii)(A) of this section
and pursuant to which a target corpora-
tion shareholder has an election to receive
stock and/or money and other propert
in respect of target corporation stock i
treated as providing for fixed considera
tion if the contract provides
(i) The minimum number of shares o
each class of stock of the issuing corpora
tion and the maximum amount of money
and other property (identified either b
value or by specific description) to be ex
changed for all of the proprietary interest
in the target corporation; or
(ii) The minimum percentage of th
number of shares of each class of propri
etary interests in the target corporation
or the minimum percentage (by value) o
the proprietary interests in the target cor
poration, to be exchanged for stock of th
issuing corporation, provided that the pro
prietary interests in the target corporatio
to be exchanged for stock of the issuing
corporation and the proprietary interest
in the target corporation to be exchangefor consideration other than stock of th
issuing corporation each represents a
economically reasonable exchange as o
the last business day before the first dat
there is a binding contract to effect th
potential reorganization.
(2) Special rules. (i) In the case o
a shareholder election described in para
graph (e)(2)(iii)(B)(1)(i) of this section
the determination of whether a proprietar
interest in the target corporation is pre
served shall be made by assuming the is
suance by the issuing corporation of thminimum number of shares of each clas
of stock of the issuing corporation an
the maximum amount of money and othe
property allowable under the contract an
without regard to the number of shares o
each class of stock of the issuing corpora
tion and the amount of money and othe
property actually exchanged thereafter fo
proprietary interests in the target corpora
tion.
(ii) In the case of a shareholder electio
described in paragraph (e)(2)(iii)(B)(1)(ii
of this section, the determination owhether a proprietary interest in the targe
corporation is preserved shall be made b
assuming the issuance of issuing corpora
tion stock in exchange for the minimum
percentage of the number of shares of eac
class of proprietary interests in the targe
corporation, or the minimum percentag
(by value) of proprietary interests in th
target corporation, as the case may be
to be exchanged for stock of the issuing
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corporation allowable under the contract
and without regard to the percentage of
the number of shares of each class of pro-
prietary interests in the target corporation,
or the percentage (by value) of proprietary
interests in the target corporation, actually
exchanged for stock of the issuing corpo-
ration.
(C) Contingent consideration(1) In
general. In general, the fact that a con-
tract provides for contingent consideration
will prevent a contract from being treated
as providing for fixed consideration. How-
ever, a contract will not fail to be treated
as providing for fixed consideration solely
as a result of a provision that provides for
contingent consideration, if
(i) The contingent consideration con-
sists solely of stock of the issuing corpo-
ration; and
(ii) The execution of the potential re-
organization would have resulted in thepreservation of a substantial part of the
value of the target corporation sharehold-
ers proprietary interests in the target cor-
poration if none of the contingent consid-
eration were delivered to the target corpo-
ration shareholders.
(2) Exception for escrows. For pur-
poses of paragraph (e)(2)(iii)(C)(1) of this
section, contingent consideration does not
include consideration paid in escrow to
secure targets performance of customary
pre-closing covenants or customary target
representations and warranties.(D) Escrows. Placing part of the con-
sideration to be exchanged for proprietary
interests in the target corporation in escrow
to secure targets performance of custom-
ary pre-closing covenants or customary
target representations and warranties will
not prevent a contract from being treated
as providing for fixed consideration.
(E) Anti-dilution clauses. The presence
of a customary anti-dilution clause will not
prevent a contract from being treated as
providing for fixed consideration. How-
ever, the absence of such a clause will pre-vent a contract from being treated as pro-
viding for fixed consideration if the issu-
ing corporation alters its capital structure
between the first date there is an other-
wise binding contract to effect the poten-
tial reorganization and the effective date
of the potential reorganization in a man-
ner that materially alters the economic ar-
rangement of the parties to the binding
contract.
(F) Dissenters rights. The possibility
that some shareholders may exercise dis-
senters rights and receive consideration
other than that provided for in the binding
contract will not prevent the contract from
being treated as providingfor fixed consid-
eration.
(G) Fractional shares. The fact that
money may be paid in lieu of issuing frac-
tional shares will not prevent a contract
from being treated as providing for fixed
consideration.
(iv) Valuation of new issuances. For
purposes of applying paragraph (e)(2)(i) of
this section, any class of stock, securities,
or indebtedness that the issuing corpora-
tion issues to the target corporation share-
holders pursuant to the potential reorgani-
zation and that does not exist before the
first date there is a binding contract to ef-
fect the potential reorganization is deemed
to have been issued on the last business daybefore the first date there is a binding con-
tract to effect the potential reorganization.
(v) Examples. For purposes of the ex-
amples in this paragraph (e)(2)(v), P is the
issuing corporation, T is the target corpo-
ration, S is a wholly owned subsidiary of
P, all corporations have only one class of
stock outstanding, A is an individual, no
transactions other than those described oc-
cur, and the transactions are not otherwise
subject to recharacterization. The follow-
ing examples illustrate the application of
this paragraph (e)(2):Example 1. Application of signing date rule. On
January 3 of Year 1, P and T sign a binding contract
pursuantto whichT willbe mergedwithandintoP on
June 1 of Year1. Pursuant to thecontract,the T share-
holders will receive 40P sharesand $60 ofcashin ex-
changefor all ofthe outstanding stock ofT. Twenty of
the P shares, however, will be placed in escrow to se-
cure customary target representations and warranties.
The P stock is listed on an established market. On
January 2 of Year 1, the value of the P stock is $1 per
share. On June 1 of Year 1, T merges with and into
P pursuant to the terms of the contract. On that date,
the value of the P stock is $.25 per share. None of the
stock placed in escrow is returned to P. Because the
contract provides for the number of shares of P andthe amount of money to be exchanged for all of the
proprietary interests in T, under paragraph (e)(2) of
this section, there is a binding contract providing for
fixed consideration as of January 3 of Year 1. There-
fore, whether the transaction satisfies the continuity
of interest requirement is determined by reference to
the value of the P stock on January 2 of Year 1. Be-
cause, for continuity of interest purposes, the T stock
is exchanged for $40 of P stock and $60 of cash, the
transaction preserves a substantial part of the value
of the proprietary interest in T. Therefore, the trans-
action satisfies the continuity of interest requirement.
Example 2. Treatment of forfeited escrowedstock.
(i) The facts are the same as in Example 1 except that
Ts breach of a representation results in the escrowed
consideration being returned to P. Because the con-
tract provides for the number of shares of P and the
amount of money to be exchanged for all of the pro-
prietary interests in T, under paragraph (e)(2) of this
section, there is a binding contract providingfor fixed
consideration as of January 3 of Year 1. Therefore,
whether the transaction satisfies the continuity of in-
terest requirement is determined by reference to thevalue of the P stock on January 2 of Year 1. Because,
for continuity of interest purposes, the T stock is ex-
changed for $20 of P stock and $60 of cash, the trans-
action does notpreservea substantialpart of thevalue
of the proprietary interest in T. Therefore, the trans-
action does not satisfy the continuity of interest re-
quirement.
(ii) The facts are the same as in Example 2 (i)
except that the consideration placed in escrow con-
sists solely of eight of the P shares and $12 of the
cash. Because the contract provides for the number
of shares of P and the amount of money to be ex-
changed for all of the proprietary interests in T, un-
der paragraph (e)(2) of this section, there is a binding
contract providing for fixed consideration as of Jan-
uary 3 of Year 1. Therefore, whether the transaction
satisfies the continuity of interest requirement is de-
termined by reference to the value of the P stock on
January 2 of Year 1. Because, for continuity of in-
terest purposes, the T stock is exchanged for $32 of
P stock and $48 of cash, the transaction preserves a
substantial part of the value of the proprietary interest
in T. Therefore, the transaction satisfies the continu-
ity of interest requirement.
Example 3. Redemption of stock received pur-
suant to binding contract. Thefacts are the sameas in
Example 1 except that A owns 50 percent of the out-
standing stock of T immediately prior to the merger
and receives 10 P shares and $30 in the merger and
an additional10 P shares upon therelease of the stock
placed in escrow. In connection with the merger, Aand S agree that, immediately after the merger, S will
purchase any P shares that A acquires in the merger
for $1 per share. Shortly after the merger, S pur-
chasesAs P sharesfor $20. Because thecontract pro-
vides for the number of shares of P and the amount
of money to be exchanged for all of the proprietary
interests in T, under paragraph (e)(2) of this section,
there is a binding contract providing for fixed consid-
eration as of January 3 of Year 1. Therefore, whether
the transaction satisfies the continuity of interest re-
quirement is determined by reference to the value of
the P stock on January 2 of Year 1. In addition, S is
a person related to P under paragraph (e)(4)(i)(A) of
this section. Accordingly, A is treated as exchanging
his T shares for $50. Because, for continuity of in-terest purposes, the T stock is exchanged for $20 of
P stock and $80 of cash, the transaction does not pre-
serve a substantial part of the value of the proprietary
interest in T. Therefore, the transaction does not sat-
isfy the continuity of interest requirement.
Example 4. Modification of binding con-
tractcontinuity not preserved. The facts are the
same as in Example 1 except that on April 1 of Year
1, the parties modify their contract. Pursuant to the
modified contract, which is a binding contract, the T
shareholders will receive 50 P shares (an additional
10 shares) and $75 of cash (an additional $15 of cash)
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in exchange for all of the outstanding T stock. On
March 31 of Year 1, the value of the P stock is $.50
per share. Under paragraph (e)(2) of this section,
although there was a binding contract providing for
fixed consideration as of January 3 of Year 1, terms
of that contract relating to the consideration to be
provided to the target shareholders were modified
on April 1 of Year 1. Because the modified contract
provides for the number of P shares and the amount
of money to be exchanged for all of the proprietary
interests in T, under paragraph (e)(2) of this section,the modified contract is a binding contract providing
for fixed consideration as of April 1 of Year 1. There-
fore, whether the transaction satisfies the continuity
of interest requirement is determined by reference to
the value of the P stock on March 31 of Year 1. Be-
cause, for continuity of interest purposes, the T stock
is exchanged for $25 of P stock and $75 of cash, the
transaction does not preserve a substantial part of the
value of the proprietary interest in T. Therefore, the
transaction does not satisfy the continuity of interest
requirement.
Example 5. Modification of binding contract dis-
regardedcontinuity preserved. The facts are the
same as in Example 4 except that, pursuant to the
modified contract, which is a binding contract, the T
shareholders will receive 60 P shares (an additional
20 shares as compared to the original contract) and
$60 of cash in exchange for all of the outstanding T
stock. In addition, on March 31 of Year 1, the value
of the P stock is $.40 per share. Under paragraph
(e)(2) of this section, although there was a binding
contract providing for fixed consideration as of Jan-
uary 3 of Year 1, terms of that contract relating to the
consideration to be provided to the target sharehold-
ers were modified on April 1 of Year 1. Nonethe-
less, the modification has the sole effect of providing
for the issuance of additional P shares to the T share-
holders. In addition, the execution of the terms of
the contract without regard to the modification would
have resulted in the preservation of a substantial part
of the value of the T shareholders proprietary inter-est in T because, for continuity of interest purposes,
the T stock would have been exchanged for $40 of P
stock and $60 of cash. Therefore, the modification is
not treated as a modification under paragraph (e)(2)
of this section. Accordingly, whether the transaction
satisfies the continuity of interest requirement is de-
termined by reference to the value of the P stock on
January 2 of Year 1. Despite the modification, the
transaction continues to satisfy the continuity of in-
terest requirement.
Example 6. New issuance. The facts are the same
asinExample 1, exceptthat, inlieuof the $60 ofcash,
the T shareholders will receive a new class of P secu-
rities that will be publicly traded. In the aggregate,
the securities will have a stated principal amount of$60 and bear interest at the average LIBOR (London
Interbank Offered Rates) during the 10 days prior to
the potential reorganization. If the T shareholders had
been issued the P securities on January 2 of Year 1,
the P securities would have had a value of $60 (deter-
mined by reference to the value of comparable pub-
licly traded securities). Whether the transaction sat-
isfies the continuity of interest requirement is deter-
mined by reference to the value of the P stock and the
P securities to be issued to the T shareholders on Jan-
uary 2 of Year 1. Under paragraph (e)(2)(iv) of this
section, for purposes of valuing the new P securities,
they will be treated as having been issued on January
2 of Year 1. Because, for continuity of interest pur-
poses, the T stock is exchangedfor $40of P stock and
$60 of other property, the transaction preserves a sub-
stantial part of the value of the proprietary interest in
T. Therefore, the transaction satisfies the continuity
of interest requirement.
Example 7. Economically unreasonable ex-
change. On January 3 of Year 1, P and T sign a
binding contract pursuant to which T will be mergedwith and into P on June 2 of Year 1. At that time, A
is Ts sole shareholder. Pursuant to the contract, 60
percent of the T stock will be exchanged for $80 of
cash and 40 percent of the T stock will be exchanged
for 20 shares of P stock. As of January 2, 20 shares
of P stock have a value of $20, representing only 20
percent of the value of the total consideration to be
received by the T shareholders. Because the percent-
age of proprietary interests in the target corporation
to be exchanged for stock of the issuing corporation
and the proprietary interests in the target corporation
to be exchanged for money do not each represent
an economically reasonable exchange as of the last
business day before the first date there is a binding
contract to effect the potential reorganization, under
paragraph (e)(2)(iii)(A)(3) of this section, the con-
tract is not treated as a binding contract that provides
for fixed consideration.
Example 8. Absence of anti-dilution clause. On
January 3 of Year 1, P and T sign a binding contract
pursuant to which T will be merged with and into P
on June 1 of Year 1. Pursuant to the contract, the
T shareholders will receive 40 P shares and $60 of
cash in exchange for all of the outstanding stock of T.
The contract does not contain a customary anti-dilu-
tion provision. The P stock is listed on an established
market. On January 2 of Year 1, the value of the P
stock is $1 per share. On April 10 of Year 1, P issues
its stock to effect a stock split; each shareholder of P
receives an additional share of P for each P share that
it holds. On April 11 of Year 1, the value of the Pstock is $.50 per share. Because P altered its capital
structure between January 3 and June 1 of Year 1 in
a manner that materially alters the economic arrange-
ment of the parties, under paragraph (e)(2)(iii)(E) of
this section, the contract is not treated as a binding
contract that provides for fixed consideration.
Example 9. Shareholder election with a proration
mechanism. On January 3 of Year 1, P and T sign a
binding contract pursuant to which T will be merged
with and into P on June 1 of Year 1. Pursuant to the
contract, at the shareholders election, each share of
T will be exchanged for cash of $1 or, alternatively, P
stock that has a value of $1, if the value of each share
of P stock is at least $.80 and no more than $1.20 on
the effective date of the potential reorganization; 1.25shares of P stock, if the value of each share of P stock
is less than $.80 on the effective date of the potential
reorganization; or .83 shares of P stock, if the value
of each share of P stock is more than $1.20 on the ef-
fective date of the potential reorganization. In addi-
tion, the contract provides for a proration mechanism
to ensure that 50 percent of the T shares will be ex-
changed for cash and 50 percent of the T shares will
be exchanged for P stock. On January 2 of Year 1,
T has 100 shares outstanding. The P stock is listed
on an established market. On January 2 of Year 1,
the value of the P stock is $1 per share. Because th
contract provides for the percentage of the numbe
of shares of each class of proprietary interests in T
and the percentage (by value) of the proprietary in
terests in T, to be exchanged for stock of P and th
other requirements of paragraph (e)(2)(iii)(A)(3) o
this section are satisfied, there is a binding contrac
providing for fixed consideration as of January 3 o
Year 1. Therefore, whether the transaction satisfie
the continuity of interest requirement is determine
by reference to the value of the P stock on Januar2 of Year 1. Because, for continuity of interest pur
poses, the T stock is exchanged for $50 of P stoc
and $50 of cash, the transaction preserves a substan
tial part of the value of the proprietary interest in T
Therefore, the transaction satisfies the continuity o
interest requirement.
* * * * *
(8) Effective date. Paragraphs (e)(1
and (e)(3) through (e)(7) of this section ap
ply to transactions occurring after Januar
28, 1998, except that they do not appl
to any transaction occurring pursuant to
written agreement which is binding on Jan
uary 28, 1998, and at all times thereafter
Paragraph (e)(1)(ii) of this section, how
ever, applies to transactions occurring afte
August 30, 2000, unless the transaction oc
curs pursuant to a written agreement that i
(subject to customary conditions) bindin
on that date and at alltimesthereafter. Tax
payers who entered into a binding agree
ment on or after January 28, 1998, and be
fore August 30, 2000, may request a pri
vate letter ruling permitting them to apply
the final regulation to their transaction. A
private letter ruling will not be issued unless the taxpayer establishes to the satisfac
tion of the IRS that there is not a signifi
cant risk of different parties to the transac
tion taking inconsistent positions, for Fed
eral tax purposes, with respect to the ap
plicability of the final regulations to th
transaction. Paragraph (e)(2) of this sec
tion applies to transactions occurring pur
suant to binding contracts entered into af
ter September 16, 2005.
Mark E. Matthews
Deputy Commissioner foServices and Enforcemen
Approved September 6, 2005.
Eric Solomon
Acting Deputy Assistant Secretar
of the Treasury (Tax Policy)
(Filed by the Office of the Federal Register on Septembe15, 2005, 8:45 a.m., and published in the issue of the FederaRegister for September 16, 2005, 70 F.R. 54631)
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Part III. Administrative, Procedural, and Miscellaneous
Katrina Relief SummaryNotice
Notice 200573
PURPOSE
This notice summarizes and clarifiesthe relief previously granted by the Inter-
nal Revenue Service (IRS) under sections
6081, 6161, 6656, and 7508A of the Inter-
nal Revenue Code with respect to taxpay-
ers affected by Hurricane Katrina. The IRS
is endeavoring to identify affected taxpay-
ers who are eligible for relief. In order to
assist the IRS in identifying affected tax-
payers to ensure that they receive the re-
lief to which they are entitled, affected tax-
payers should mark Hurricane Katrina
in red ink on the top of their returns and
other documents for which the IRS has
postponed the due dates. Affected taxpay-
ers should also identify themselves as an
affected taxpayer if the IRS sends them a
notice or makes any other direct contact,
e.g., telephone calls.
In response to Hurricane Katrina, on
August 28, 2005 and August 29, 2005, the
President issued four federal disaster dec-
larations covering the states of Alabama,
Mississippi, Louisiana, and Florida. The
presidential declarations authorized, un-
der the Robert T. Stafford Disaster Reliefand Emergency Assistance Act, 42 U.S.C.
51215206 (Stafford Act), the Federal
Emergency Management Agency (FEMA)
to provide Individual Assistance, Public
Assistance, and assistance under the Haz-
ard Mitigation Grant Program to counties
and parishes in each state. Under that
authority, FEMA determined that certain
counties and parishes within those states
were eligible for Individual Assistance,
Public Assistance, or both. FEMA also
determined that all counties and parishes
in all four of the states were eligible toapply for assistance under the Hazard Mit-
igation Grant Program.
By news releases issued on August 30,
2005, September 2, 2005, September 8,
2005, and September 14, 2005, the IRS
granted relief from filing and payment
deadlines, and granted relief from the acts
listed in Treas. Reg. 301.7508A1(c)(1)
and Rev. Proc. 200527, 200520 I.R.B.
1050, for taxpayers in the counties and
parishes designated by FEMA for Indi-
vidual Assistance and/or Public Assis-
tance. See IR200584, IR200591,
IR200596, and IR2005103. The
counties and parishes designated by
FEMA as being eligible for Individual
Assistance and/or Public Assistance con-stitute a covered disaster area within the
meaning of section 301.7508A1(d)(2).
See the Appendix to this notice for a
list of counties and parishes designated
by FEMA for Individual Assistance and
Public Assistance (counties and parishes
designated by FEMA for Individual As-
sistance are generally also granted Public
Assistance, but for purposes of this notice
will be referred to as Individual Assistance
areas). The IRS will continue to monitor
closely the impact of Hurricane Katrina
and may grant other relief under appropri-ate circumstances for affected taxpayers
or affected areas.
The relief detailed below applies to all
the counties and parishes listed in the Ap-
pendix to this notice, and to counties and
parishes that FEMA later designates as be-
ing eligible for Individual and/or Public
Assistance as a result of the devastation
caused by Hurricane Katrina.
BACKGROUND
Under the Stafford Act, the Presidentcan authorize FEMA to implement several
different types of assistance in response
to a disaster. Pursuant to this authority,
and based on the severity of the disaster,
FEMA designates certain areas affected by
the disaster as eligible for Individual As-
sistance and/or Public Assistance.
When the President declares a disaster
and FEMA designates areas for assistance,
the IRS has authority under section 7508A
to grant blanket relief to taxpayers. In ad-
dition, the IRS can grant blanket relief un-
der sections 6081, 6161, and any other pro-vision providing for a waiver of a penalty
for reasonable cause, such as section 6656.
Ordinarily, the IRS only grants blanket
relief for taxpayers associated with the ar-
eas FEMA designates for Individual As-
sistance because in those areas the dev-
astation from the disaster is more wide-
spread. However, in view of the extreme
need for relief in the aftermath of Hurri-
cane Katrina, the IRS granted relief fortax-
payers associated with those areas desig-
nated by FEMA for Individual Assistance
and Public Assistance.
Relief with respect to a Presiden-
tially-declared disaster under sections
6081, 6161, 6656, and 7508A is only
available when the IRS grants such relief.Generally, the IRS will publish a notice
or issue other guidance (including an
IRS News Release) authorizing the relief.
Such guidance will describe the relief, the
duration of the relief, and the location of
the covered disaster area.
Summary of the Acts for Which a Period
May be Disregarded
Section 6081 provides that the Secre-
tary may grant a reasonable extension of
time (generally not to exceed 6 months) for
filing any return, declaration, statement,
or other document required by the Internal
Revenue Code or by regulations thereun-
der.
Section 6161 provides that the Secre-
tary may grant a reasonable extension of
time (generally not to exceed 6 months) for
paying the amount (or any installments) of
tax shown or required to be shown on any
return or declaration required by the Code
or by regulations thereunder.
Section 6656 provides for an addition
to tax for any failure to deposit tax in agovernment depository as required by the
Code or regulations on the date prescribed
therefor, unless such failure is due to rea-
sonable cause and not due to willful ne-
glect.
Section 7508A provides the Secre-
tary with authority to postpone the time
for performing certain acts under the in-
ternal revenue laws for a taxpayer the
Secretary determines is affected by a
Presidentially-declared disaster. Section
7508A(a)(2) also provides the Secretary
with authority to disregard a period of upto one year in determining the amount of
any interest, penalty, additional amount,
or addition to the tax for an affected tax-
payer. Pursuant to section 7508A(a) and
section 301.7508A1, a period of up to
one year may be disregarded in determin-
ing whether the performance of certain
acts is timely under the internal revenue
laws. Section 301.7508A1(c)(1) lists
several acts performed by taxpayers for
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which section 7508A relief may apply.
Among these acts are the filing of certain
tax returns; the payment of certain taxes;
the making of deductible contributions
to certain retirement plans and individual
retirement arrangements; the filing of a
Tax Court petition; the filing of a claim for
credit or refund of tax; and the bringing of
a lawsuit upon a claim for credit or refund
of tax.
Revenue Procedure 200527 provides
a list of time-sensitive acts, the perfor-
mance of which may be postponed under
section 7508A. The list of acts in Rev.
Proc. 200527 supplements the list of
postponed acts in section 301.7508A1 of
the regulations. The acts set forth in Rev.
Proc. 200527 are those that the IRS com-
monly postpones in the event of a Presi-
dentially-declared disaster.
Affected Taxpayers Whose Acts May bePostponed
Section 301.7508A1(d)(1) describes
several types of affected taxpayers el-
igible for postponement of up to one
year. These taxpayers include any indi-
vidual whose principal residence, and any
business entity whose principal place of
business, is located in the covered disaster
area; any individual who is a relief worker
affiliated with a recognized government
or philanthropic organization and who is
assisting in the covered disaster area; anyindividual whose principal residence, and
any business entity whose principal place
of business, is not located in the covered
disaster area, but whose records necessary
to meet a filing or payment deadline are
maintained in the covered disaster area;
any estate or trust that has tax records nec-
essary to meet a filing or payment deadline
in a covered disaster area; and any spouse
of an affected taxpayer, solely with regard
to a joint return of the husband and wife.
Therefore, taxpayers located outside of
the covered disaster area may qualify forrelief.
Additionally, under section 301.7508A
1(d)(1)(vii), the IRS may determine
that any other person is affected by a
Presidentially-declared disaster and
therefore eligible for relief. Accordingly,
the IRS has determined that the following
persons are also affected by Hurricane
Katrina and its aftermath: (1) all workers
assisting in the relief activities in the
covered disaster areas, regardless
of whether they are affiliated with
recognized government or philanthropic
organizations; (2) any individual whose
principal residence, and any business
entity whose principal place of business,
is not located in the covered disaster area,
but whose tax professional/practitioner is
located in the covered disaster area; and
(3) individuals, visiting the covered
disaster areas, who were killed or injured
as a result of Hurricane Katrina and its
aftermath. For purposes of (3) above,
the estate of an individual visiting the
covered disaster who was killed as a
result of the hurricane is also considered
to be an affected taxpayer.
SUMMARY OF RELIEF GRANTED
WITH RESPECT TO HURRICANE
KATRINA
The news releases issued by the IRS
on August 30, 2005, September 2, 2005,
September 8, 2005, and September 14,
2005, granted the following relief:
(1) Affected taxpayers as defined by
section 301.7508A1(d)(1) and clarified
by this notice have until January 3, 2006,
to file certain federal tax returns otherwise
due (originally or on extension) on or after
August 29, 2005 (August 24, 2005, for
Florida affected taxpayers), and on or be-
fore January 3, 2006, and to pay the tax
shown or required to be shown on thosereturns. In addition, the period from Au-
gust 29, 2005 (August 24, 2005 for Florida
affected taxpayers), until January 3, 2006,
will be disregarded in the calculation of
any interest and any failure to file or pay
addition to tax under section 6651. Thus,
any interest or addition to tax for failure to
file a return or to pay the tax due accruing
as of August 29, 2005 (August 24, 2005
for Florida affected taxpayers), would stop
accruing as of that date and would start ac-
cruing again after January 3, 2006 (or such
later date that the IRS might subsequentlyprovide), if the return was not filed or tax
was not paid by that date. An affected tax-
payer who receives an IRS notice asserting
a penalty for this period should call the
number on the notice or the IRS toll-free
disaster hotline at 18665625227 to
receive penalty abatement. The applica-
ble returns include individual income tax
returns (Forms 1040, 1040A, 1040EZ,
1040NR, or 1040NR-EZ), gift tax returns
(Forms 709 and 709-A), partnership re
turns (Form 1065), corporate income ta
returns (Forms 1120 and 1120S), estat
and trust income tax returns (Form 1041)
estate tax returns (Form 706), annual re
turns filed by tax-exempt organization
(Form 990 (series)), certain excise ta
returns (Form 720) and employment tax
returns (Form 941). See Treas. Reg
301.7508A1(c)(1)(i) for a list of af
fected returns.
(2) Although a postponement is pro
vided for filing certain excise tax an
employment tax returns, and making pay
ments of excise tax and employment tax
most employers and entities responsi
ble for excise and employment tax must
under section 6302 and the regulation
thereunder, deposit the tax throughou
the return period (usually every quarter)
Although the time for making these de
posits has not been extended under sectio7508A, the IRS has authority under sec
tions 6656 and 7508A(a)(2) to waive th
penalty that would otherwise apply to
failure to make a timely deposit. The IR
has concluded that taxpayers affected b
Hurricane Katrina may have difficult
in making timely federal tax deposits i
accordance with section 6302. Accord
ingly, for deposits required to be mad
by affected taxpayers on or after Augus
29, 2005 (August 24, 2005 for Florida af
fected taxpayers), and on or before Januar
3, 2006, the IRS will waive the additionto tax under section 6656 for the failur
to timely make any deposit of tax if th
deposit is made on or before January 3
2006.
The relief from the failure to timely de
posit addition to tax is intended for taxpay
ers who are unable to meet their deposi
obligations because their (or their servic
providers) records, computers, or othe
essential supporting services were dam
aged, or essential personnel were injured
by the hurricane or any subsequent flood
ing. Thus, although the waiver applies tall affected taxpayers, taxpayers that ar
reasonably able to make their deposits ar
encouraged to do so.
(3) The due date of any estimated ta
payment for tax year 2005 originally du
on or after August 29, 2005 (August 24
2005 for Florida affected taxpayers), an
before January 3, 2006, for taxpayers lo
cated in the covered disaster area, an
other affected taxpayers, is postpone
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until January 3, 2006. This applies to esti-
mated tax payments made by individuals,
corporations, estates, and trusts. Thus,
for individuals and calendar year corpo-
rations, the third estimated tax payment
for tax year 2005, due on September 15,
2005, is not due until January 3, 2006.
Affected taxpayers will not be subject to
penalties for failure to pay estimated tax
installments for tax year 2005 with respect
to installments that were originally due
on or after August 29, 2005 (August 24,
2005 for Florida affected taxpayers), and
before January 3, 2006, as long as such
installments are paid by January 3, 2006.
(4) A postponement until January 3,
2006, is granted for each act listed in sec-
tion 301.7508A1(c)(1) and Rev. Proc.
200527 for affected taxpayers, excluding
Florida affected taxpayers, if the last day
to perform the act would otherwise fall
within the period beginning on August 29,2005, and ending on January 3, 2006. For
Florida affected taxpayers, the period be-
gins on August 24, 2005, and ends on Jan-
uary 3, 2006.
(5) Partners, S corporation sharehold-
ers, and beneficiaries of trusts and estates
use the information reported to them on
Schedule K1 by their partnerships, cor-
porations, trusts, or estates to prepare their
own income tax returns. If the income tax
return of the partnership, S corporation,
trust or estate was postponed or extended,
the partner, S corporation shareholder, orbeneficiary of a trust or estate might not
receive the Schedule K1 prior to the due
date or extended due date of the partners,
shareholders, or beneficiarys income tax
return. The income tax return of a part-
ner, shareholder, or beneficiary is notpost-
poned or extended solely because the en-
tity (the partnership, S corporation, trust,
or estate) is an affected taxpayer.
Partners, shareholders, and beneficia-
ries of trusts and estates may request ex-
tensions of time to file their income tax re-
turns. See I.R.C. 6081. If the Sched-ule K1 is not received by the extended
due date, the partner, shareholder, or ben-
eficiary should prepare and file the in-
come tax return on a timely basis by mak-
ing a reasonable estimate in good faith of
items of income, gain, loss, deduction, and
credit attributable to the taxpayers inter-
est in the entity. Later, when the Sched-
ule K1 is received, the taxpayer should
prepare an amended return reflecting the
items reported on the Schedule K1. If
the taxpayers original return underesti-
mated items of income or gain, or over-
stated items of deduction, loss, or credit,
and a late payment penalty attributable to
these items is assessed, thetaxpayershould
request an abatement of the penalty forrea-
sonable cause. If the original return was
prepared in good faith based on reason-
able estimates of the tax items attributable
to the entity, the IRS will waive or abate
penalties for late payment.
(6) Taxpayers who believe they are en-
titled to relief under the news releases is-
sued on August 30, 2005, September 2,
2005, September 8, 2005, and Septem-
ber 14, 2005, as clarified by this notice,
should mark Hurricane Katrina in red
ink on the top of their return and other
documents submitted to the IRS. In the
counties and parishes designated for In-
dividual Assistance, relief will automati-cally be granted, but affected taxpayers are
nonetheless strongly encouraged to mark
their returns and other documents or oth-
erwise alert the IRS to the need for relief.
In the counties and parishes designated for
Public Assistance, and for other affected
taxpayers, relief will be granted if the IRS
is notified of the need for relief. Accord-
ingly, these taxpayers need to mark their
returns and documents, or otherwise alert
the IRS to the need for relief.
DRAFTING INFORMATION
The principal author of this notice is
Dillon Taylor of the Office of Associate
Chief Counsel (Procedure & Administra-
tion). For further information regarding
this notice, contact Dillon Taylor at (202)
6224940 (not a toll-free call).
APPENDIX
The August 28, 2005 declaration for
Florida, as amended on September 6,
2005, covers the following 11 counties
designated for Public Assistance: Bay,
Broward, Collier, Escambia, Franklin,
Gulf, Miami-Dade, Monroe, Okaloosa,
Santa Rosa, and Walton.
The August 29, 2005 declaration for
Alabama, as amended on September 9,
and 11, 2005, covers the following 10
counties designated Individual Assistance:
Baldwin, Choctaw, Clarke, Greene, Hale,
Mobile, Pickens, Sumter, Tuscaloosa, and
Washington; and the following 12 coun-
ties eligible for Public Assistance: Bibb,
Colbert, Cullman, Jefferson, Lamar, Laud-
erdale, Marengo, Marion, Monroe, Perry,
Wilcox, and Winston.
The August 29, 2005 declaration for
Mississippi, as amended on September 4,
6, and 11, 2005, covers the following 47counties designated for Individual Assis-
tance: Adams, Amite, Attala, Claiborne,
Choctow, Clarke, Copiah, Covington,
Franklin, Forrest, George, Greene, Han-
cock, Harrison, Hinds, Jackson, Jasper,
Jefferson, Jefferson Davis, Jones, Kem-
per, Lamar, Lauderdale, Lawrence, Leake,
Lincoln, Lowndes, Madison, Marion,
Neshoba, Newton, Noxubee, Oktibbeha,
Pearl River, Perry, Pike, Rankin, Scott,
Simpson, Smith, Stone, Walthall, War-
ren, Wayne, Wilkinson, Winston, and
Yazoo; and the following 35 countiesdesignated for Public Assistance: Al-
corn, Benton, Bolivar, Calhoun, Carroll,
Chickasaw, Clay, Coahoma, DeSoto,
Grenada, Holmes, Humphreys, Issaquena,
Itawamba, Lafayette, Leflore, Lee, Mar-
shall, Monroe, Montgomery, Panola,
Pontotoc, Prentiss, Quitman, Sharkey,
Sunflower, Tallahatchie, Tate, Tippah,
Tishomingo, Tunica, Union, Washington,
Webster, and Yalobusha.
The August 29, 2005 declaration for
Louisiana, as amended on September 9,2005, covers the following 31 parishes
designated for Individual Assistance:
Acadia, Ascension, Assumption, Cal-
casieu, Cameron, East Baton Rouge, East
Feliciana, Iberia, Iberville, Jefferson,
Jefferson Davis, Lafayette, Lafourche,
Livingston, Orleans, Pointe Coupee,
Plaquemines, St. Bernard, St. Charles,
St. Helena, St. James, St. John, St. Mary,
St. Martin, St. Tammany, Tangipahoa,
Terrebonne, Vermilion, Washington, West
Baton Rouge, and West Feliciana; and
the following 33 parishes designated forPublic Assistance: Allen, Avoyelles,
Beauregard, Bienville, Bossier, Caddo,
Caldwell, Catahoula, Claiborne, Concor-
dia, Desoto, East Carroll, Evangeline,
Franklin, Grant, Jackson, LaSalle, Lin-
coln, Madison, Morehouse, Natchitoches,
Ouachita, Rapides, Red River, Richland,
Sabine, St. Landry, Tensas, Union, Ver-
non, Webster, West Carroll, and Winn.
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Announcement of Rules to beIncluded in RegulationsUnder Section 367(a)Regarding the Effect ofCertain Exchanges on GainRecognition Agreements andRequest for Comments
Notice 200574
SECTION 1. OVERVIEW
This notice announces that Treasury
and the Internal Revenue Service (IRS)
will amend the regulations under section
367(a) of the Internal Revenue Code re-
garding the application of Treas. Reg.
1.367(a)8, including the provisions
addressing the treatment of gain recog-
nition agreements as a result of certain
common asset reorganizations involvingthe U.S. transferor, the transferee foreign
corporation, and the transferred corpo-
ration. These regulations will supple-
ment the existing rules under Treas. Reg.
1.367(a)8, including the rules under
Treas. Reg. 1.367(a)8(f) through (h).
As described below, taxpayers may rely
on this notice for exchanges occurring on
or after July 20, 1998 (the effective date
of Treas. Reg. 1.367(a)8).
No inference is intended on the appli-
cation of the current provisions of Treas.
Reg. 1.367(a)8 to asset reorganiza-tions, and other transactions, that are not
addressed in this notice.
SECTION 2. BACKGROUND
Section 367(a)(1) provides that if, in
connection with any exchange described
in section 332, 351, 354, 356, or 361,
a Un